10/10/2016
Managing Beneficiary Expectations:
Beneficiary Needs vs. Fiduciary Duties;
Trustee Best Practices; Compliance Oversight
Peter J Wall
National Oversight Manager
Disability & Elder Trust Solutions
BOK Financial
Vice President, Trust Officer
Colorado State Bank & Trust
303.864.7238
[email protected]
Presenter’s bio:
Peter J Wall leads the Disability & Elder Trust Solutions division of
BOK Financial and is a Vice President and Trust Officer for Colorado
State Bank and Trust. Now in his 16th year of trust administration,
Peter focuses his efforts in the Elder Law arena and is known for
his Special Needs Trust administration and planning capabilities
throughout the country. A Bachelor of Arts graduate from the
University of Northern Colorado, Mr. Wall is the current President
for the Centennial Estate Planning Council, former President of the
Denver Trust Officers Association, and a Board Member of VSA
Colorado Access Gallery. He is a frequent presenter on the topics
of Special Needs Trusts, estate planning, taxation, and trust
administration for numerous professional and community groups
and was a presenter and faculty member at the CBA 2012, 2014
and 2015 Elder Law Retreat, the 2013 National Down Syndrome
Congress, 2015 46th Annual Autism Society National Conference &
the 2016 Stetson National Special Needs Trust Conference. Mr.
Wall is also a published author, most notably in the Elder Law in
Colorado Red Book, Fourth Edition.
LANDSCAPE: 2016
Office of the Comptroller of the Currency (“OCC”)
• Audits up to 3-4 times/year
• New regulations/guidelines and areas of emphasis every year
• SNTs now = “high risk” accounts
• “Too-big-to-fail” -> lower tier nationally chartered -> state chartered
Dodd-Frank Wall Street Reform & Consumer Protection Act
Effective July 21, 2010 with new reforms/controls/agencies every year
thereafter
• Biggest changes in financial regulation since Great Depression
• Large bank trust officers now spend a majority of their time on compliance
related tasks
• July 29, 2015 CNN report: before 2008, over 100 banks on average opened
every year; since 2010, 3 bank openings
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Additional Acts & Agencies:
Office of Foreign Asset Control (“OFAC”), Foreign Account Tax Compliance
Act (“FATCA”), Bank Secrecy Act (“BSA”), Anti-Money Laundering Act
(“AML”)
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10/10/2016
LANDSCAPE: 2016
Consumer Financial Protection Bureau
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Created by Dodd-Frank Act
CFPB tasked with consumer protection and has jurisdiction over banks,
credit unions, securities firms, lenders, debt collectors and “other
financial professionals”
June 18, 2013 press release from the US House Financial Services
Committee:
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CFPB “is controlled by a single individual who cannot be fired for
poor performance and who exercises sole control over the agency,
its hiring and its budget”
2013 = budget of $541 million and increased staff to more than
1,200 “with no oversight from Congress, the President or the
Federal Reserve”
“[…] lack of accountability to both Congress and the administration
for an agency run by a single director creates enormous risk of
abuse through the broad discretion enabled by the CFPB’s Civil
Penalty Fund”
FINANCIAL REGULATORY STRUCTURE
Financial Stability Oversight Council
HUD
FDIC
CFPB
Mortgages &
Insurance
Consumer
Lending
Hedge
Fund/Private
Equity
Federal
Reserve
OCC
Investment
Management
Broker-Dealer
CFTC
Investment
Banking
SEC
Payment &
Clearing
FINRA
Trust
LANDSCAPE: 2016
Traveler’s Group
Citicorp
EA Bank
Banamex
Washington Mutual
Great Western Fin.
Dime Bancorp
First Chicago
Banc One
JP Morgan
Chase Manhattan
Chemical Banking
Bear Stearns
US Trust
MBNA
Bank America
Fleet Fin. Group
Bancboston Holdings
Baybanks
Summit Bancorp
UJB Financial
Countrywide Financial
Merrill Lynch
Wells Fargo
First Interstate Bancorp
NW Holding Co.
Southtrust
Wachovia
Central Fid. Nat’l Bank
First Union
The Money Store
Citigroup
Citigroup
Washington Mutual
Bank One
JP Morgan Chase
JP Morgan Chase
Chase Manhattan
Bank of America
Bankboston
Fleetboston Financial
Summit Bancorp
Bank Of America
Wells Fargo
Wachovia
Wells Fargo
Wachovia
First Union
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10/10/2016
Being A Trustee
Trustee Duties
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Secure and protect trust assets
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Loyalty & impartiality
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Compliance with trust document terms/settlor intent
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Accountings & statement production
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Discretionary distributions
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Investment of trust corpus
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Making all trust property productive
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Taxes
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Compliance: federal vs. state vs. county
Uniform Principal & Income Act
Uniform Prudent Investor Act
Being A Trustee
Longevity of trust
• Beneficiary Expectations and Anticipations
• Anticipated Income vs. Total Return
“Jack Of All Trades” or “Master of None”?
• Counsel
• Financial Advisor
• Budget Analyst
• Public Benefits Consultant
• Family Mediator
• Psychologist
Funding?
• Draper v. Colvin, No. 12-4091-KES (D. S.D. July 10,
2013)
Being A Trustee
In the Matter of the Accounting of J.P. Morgan Chase Bank, N.A., and H.J.P.
as co-Trustees of the Mark C.H. Discretionary Trust of 1995 v. Marie H.,
956 N.Y.S.2d 856 (N.Y. Surr. Ct., 2012)
• Third party discretionary trust for the benefit a young man on the
Autism Spectrum living in a group home
• Neither co-trustee or their duly acting agents had visited beneficiary
in five years
• Court determined that Mark lacked any type of advocacy for his
ongoing needs, save $3,525 expended from the trust for a care
manager. The vast majority of the distributions from Mark’s trust
were fees for the trustee and their counsel
• Trustee’s “excuse for inaction was its lack of institutional capacity to
ascertain or meet the needs of this severely disabled…young man”
• Trustee’s “failure to fulfill their obligations should result in denial or
reduction of their commissions for the period of inaction”
• Highly publicized in The Village Voice
• Trustee’s affirmative duty to be proactive in researching,
documenting and providing for SNT beneficiary’s needs
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10/10/2016
Being A Trustee
Discretionary Distributions
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Regardless of trust establishment advantages (tax, asset protection, public
benefits), beneficiary conflict and mismanagement can quickly defeat the
trust’s purpose
Widely variable distribution provisions interpretation
• Health, Education, Maintenance & Support (“HEMS”)
• “support” and “maintenance” virtually synonymous: distributions
necessary to maintain the beneficiary in the beneficiary’s
accustomed manner of living
• RESTATEMENT (THIRD) OF TRUSTS (2003) expands HEMS to include
support of beneficiary’s children, household expenses, suitable
education for the beneficiary’s children, regular mortgage
payments, property taxes, healthcare, existing programs of
life/property insurance, and continuation of accustomed patterns
of vacation and charitable/family gifting.” Id. § 50
• Health
• reasonable distributions to provide fully for all things healthrelated for the beneficiary
• RESTATEMENT (THIRD) OF TRUSTS (2003) “health” is included in
“support” and “maintenance” provisions and notes that
“distributions may increase…[due to] needs resulting from
situations such as deteriorating health or added burdens from the
needs of another.” Id. § 50 cmt. d(2)
Being A Trustee
•
Liranzo v. LI Jewish Education/Research, N.Y. Sup. Ct., Kings
Co., No. 28863/1996 (June 25, 2013)
• Trustee privately paid for caregivers and other services at request of
minor beneficiary’s guardian that may have been available to the
beneficiary through different public benefits programs
• The trust was quickly depleted and the trustee sought relief from the
court when the trust became uneconomical to retain
• The court concluded that the trustee should have sought out all
available alternative avenues to pay for such services and directed
the trustee itself to reimburse the trust almost $176,000
• SNT trustee’s duty to inquire and research all avenues of
paying for such requests before approval in order to protect
the trust’s longevity
Being A Trustee
Discretionary Distributions
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See Appendix, Section 2 for sample Discretionary
Distribution Form
• TIP: dual control
• Note any potential impact on benefits
• Cite pertinent trust document provisions
• Include synopsis of beneficiary’s benefits
• Note “who” is requesting distribution
• Cite remainder person provisions
“Wasting” trust?
• TIP: notify beneficiary of wasting trust no less than
annually
Policies & Procedures in re: discretionary distributions must be
applied uniformly to all beneficiaries
TIP: document all discretionary distribution denials
TIP: appeal process
“No, but…”
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10/10/2016
Being A Trustee
Investments
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Longevity of trust
• Wasting trust
• House and a vehicle
Anticipated Income vs. Total Return
“Heirloom” or “legacy” investments
• Uniform Prudent Investor Act
• Diversification
• Tax advisor
“Unique” investments
• Delegation to experienced, well-vetted professional
Overly conservative portfolios
• One size does not fit all
• Duty to fully incorporate every beneficiary’s time horizon and
applicability of investment objective
• Inflationary pressures
• Life expectancy/Life Care Plan
Being A Trustee
In re: Mark Anthony Fowler Special Needs Trust, No.
39729-3 (WA Ct. App. Feb. 8, 2011)
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Trust established in 2000 from PI settlement; beneficiary expected to
live another 58 years
2008 accounting by trustee shows 12% loss in performance.
• Growth with Income investment strategy
• Outperformed S&P 500 by 2.5% over same time period.
Court refused to approve trustee’s accounting & ordered all trust assets
to be invested in FDIC-insured money market vehicles with diversified
institutions
Overly conservative approach testified against by trustee’s investment
professional as well as beneficiary’s GAL
Washington Court of Appeals reversed lower court’s decision.
“Beneficiaries can be disserved by undue conservatism”
Being A Trustee
Investments
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Delegated vs. Directed Investment Advisor
Due Diligence
• www.bbb.org
• SEC Form ADV Part 1 & 2
• Investment advisor’s disciplinary history (ADV, Item 11)
• Annual review of FINRA brochure
• Conflicts of interest
• 12-b-1 fees
• Proprietary investment products
• Mutual fund share classes
• Assets under management
• Experience in SNT arena
• See Appendix, Section 3 for sample Investment Advisor
Firm Review Form
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10/10/2016
Being A Trustee
Taxes

Grantor Trust (1st Party trusts only)
• Internal Revenue Code § 674 & § 677
• Can be appropriate for self-administered SNTs
• Taxability flows through to beneficiary on personal 1040 at applicable
beneficiary rate

Qualified Disability Trust (SNT) / 3rd Party Trust (Family Trust, etc)
• Appropriate vehicle when using a professional fiduciary or family member
• Obtain a TIN by submitting a SS-4 or online at www.irs.gov
• Trust files a 1041 annually
• Taxability flows through to beneficiary via K-1, to be reported on their
personal 1040
• Take deductions for professional expenses on K-1 as applicable
• Taxable events (capital gains, interest, etc) may pass through and be taxed at
beneficiary level / rates
• Be aware of Principal and Income accounting
Tax – American Taxpayer Relief Act of 2012
Tax
2012
2016
Medicare
Tax
Highest
Rate
15%
20%
3.8%
23.8%
35%
39.6%
3.8%
43.4%
35%
39.6%
3.8%
43.4%
$5.12MM
exempt, 35%
$5.4MM exempt,
40%
ST Cap
Income
Estate Tax
Trust Tax Rates (simplified) - 2016
Income Subject To Tax
Rate
< $2,450
15%
$2,451 < $5,700
$367.50 plus 25%
$5,701 < $8,750
$1,180.50 plus 28%
$8,751 < $11,950
$2,034 plus 33%
> $11,950
$3,090 plus 39.6%
Being A Trustee
Compliance
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Third Party Relationships (Vendors) – OCC
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OCC Bulletin 2013-29: www.occ.gov/news-issuances/bulletins/2013/bulletin2013-29.html
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“any business arrangement between a [fiduciary] and another entity, by
contract or otherwise”
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The “use of third parties does not diminish the responsibility of [the fiduciary] to
ensure that the activity is performed in a safe and sound manner and in
compliance with applicable laws.”
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Trustee “should ensure comprehensive risk management and oversight of thirdparty relationships … throughout the life cycle of the relationship”
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Addresses the outsourcing of tax, legal, audit and IT functions AND “third
parties that engage directly with customers” (case/care managers)
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Requires proper and thorough vetting, planning, due diligence and third-party
selection, contract negotiation, ongoing monitoring, independent reviews, etc.
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Requires risk management oversight in re: client protected information to
include assessment of third-party’s security
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Requires assessment of third-party’s financial condition, resilience & succession
planning
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Requires review of third-party’s insurance coverage and disaster recovery
program
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Requires establishment and annual review of third-party’s performance via
benchmarks
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10/10/2016
Being A Trustee
Compliance
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High-Risk Determination
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Reside in foreign jurisdiction, nonresident aliens, trust/funding are
offshore, account type/size/assets are atypical for trustee, unjustifiable
international funds transfers, funded by easily transported assets
(gems, coins, collectibles), benefit charitable organizations, etc.
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TIP: if account is high-risk, perform bi-annual reviews
Politically Exposed Person (PEP)
“current or former senior foreign political figure, their immediate
family, and their close associates”
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Domestic = ‘elected positions at both the state or major city level’
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“Immediate Family” = parents, siblings, spouse, children & in-laws
Bank Secrecy Act (BSA)/Anti-Money Laundering Act (AML)
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TIP: record upfront all anticipated monthly/annual anticipated
transfers, both foreign and domestic
Being A Trustee
Compliance
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AML: determine how beneficiary acquired funds
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OFAC: trustees now = proxy for federal government in War on Terror
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TIP: Not just “lifetime earnings”, document “how”
TIP: record/print applicable Specially Designated Nationals and
Blocked Persons (“SDN List”) www.treasury.gov/ofac/downloads/sdnlist.txt
W-9 and ID
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Affidavit of beneficiary’s social security number and confirmation
beneficiary is not subject to backup withholding
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Foreign Account Tax Compliance Act (FATCA)
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See Appendix, Section 1 for Sample Beneficiary Intake Form
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TIP: Ensure beneficiary has no “foreign financial accounts” via
confirmation letter or statement on intake form
Relationship Building
“A principles-based regime, more so than a rules-based one, can only work if administered
by people with principles” and “a trusteeship brings with it ‘no small degree of trouble and
anxiety,’ at least for the trustee who is conscientious.” – Rounds, Jr., Charles E. and Rounds,
III, Charles E. Loring and Rounds, 2014: A Trustee’s Handbook: Wolters Kluwer Law and
Business. 2014. Print.
Common Ground
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Engage your beneficiary from the very first meeting and find common
connections
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What do you do both professionally and in your spare time?
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What are your passions?
Discuss immediate beneficiary needs and record for future reference
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House? Vehicle?
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Monthly budget
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Trust longevity projection
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See Appendix, Section 1 for Sample Beneficiary Intake Form
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10/10/2016
Relationship Building
Common Ground
“Optimal Outcomes”
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Start a business
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College expenses
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Annual vacations
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Remainder person considerations
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TIP: record all of the above for future use
Manage negativity from the onset.
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Anxiety about the trust? Or its investments?
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Questions about your public benefits?
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What puzzles the beneficiary about the trust?
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Share common experiences of other beneficiaries.
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Loss of control
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Settlors controlling from “beyond the grave”
Relationship Building
Common “Enemies”
Public benefits agencies - “red tape”
Settlors
State statutes and common law
Federal vs. state vs. county regulations
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Coats v. Dish Network, LLC, 350 P.3d 849, 99 (CO 2015)
Uniform Prudent Investor Act
TIP: Know the “how” and the “why”
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Common Lingo
Income
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POMS – “Income is any item an individual receives in cash on in-kind that can be used
to meet his or her need for food or shelter. Income includes…the receipt of any item
which can be applied, either directly or by sale or conversion, to meet basic needs of
food or shelter.” (SI 00810.005)
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HUD: DeCambre v Brookline Housing Authority (D.Mass, No. 14-13425-WGY, March 25,
2015)
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Trust Principal and Income Accounting
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IRS
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Earned Income
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Taxable vs. Non-Taxable Income (IRS Publication 525)
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Trustee Best Practices
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Don’t “think outside of the box” when it comes to
public benefits regulations. Instead, know the box so
well that you’ve expanded its corners as far as
possible. Loop holes always get closed – want to be
the test case?
Consider providing statements and accountings to
State even if not so required
Review your co-trustee delegation of duties
agreements
Do not assume a beneficiary’s family or trusted
advisor is privy to confidential information. Always
get a beneficiary’s release and authorization
Obtain past three years fiduciary tax returns (1041s)
from prior trustee
Consider indemnification form for all acts and
omissions of prior trustee if not so indemnified in trust
document or state statute
Keep copies of all client estate planning documents
Disclose fee schedule at onset and keep on file
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10/10/2016
Trustee Best Practices
Encourage beneficiaries to exercise all power of
appointments and keep copy in case of will contest
Provide beneficiary with approved distribution list at
onset of relationship
•
See Appendix, Section 1 for Sample Approved
Distribution Form graciously provided by the
Colorado Fund for People with Disabilities
Drafting attorneys: settlor letter of intent (precatory)
Drafting attorneys: consider use of Trust Advisor
Allow for “wiggle room” when setting expectations
Know anticipated settlement dates
• Stocks = Trade Date (T) + 3
• Mutual Funds = T + 1
• Bonds = variable
• Know your bank’s wire/ACH deadlines
DOCUMENT EVERYTHING
Duty of loyalty and impartiality: a trustee must set
aside its own personal values and bias
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The Ideal Trustee
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In-depth public benefits knowledge
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Ability to stay abreast of all benefit and fiduciary law changes
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Unbiased decision making capability with beneficiary’s best interests
at the forefront
Advocate of the beneficiary
Invests according to fiduciary standards (Uniform Prudent Investor
Act)
Up to date knowledge and adherence to statutory fiduciary
requirements
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Expertise in tax law
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Principal and Income accounting/bookkeeping
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Carries Errors and Omissions Insurance/Liability Insurance or is
bonded
Can properly identify second rate service providers and/pr
beneficiary abuse or financial vulnerability (see Elder Abuse Act)
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Can appear in or petition Court as needed
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Immortality
The Superb Trustee
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Go above and beyond legal duties to beneficiary
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Focus on the solution, not the problem
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No matter the case load – the beneficiary is a person, not a
number
Educate the beneficiary
Engage and involve the beneficiary in all facets of trust
administration
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Empower the beneficiary
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Make community support connections for the beneficiary
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Find common ground with beneficiary
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10/10/2016
A Happy/Engaged Beneficiary
Is More Likely To:
1)
Refer your services to a friend or family member
2)
Report back positively to the attorney who referred you
3)
Work through issues collaboratively
4)
Properly utilize their trust to supplement public benefits
A Disgruntled/Unengaged Beneficiary
Is More Likely To:
1)
Speak poorly about you in the community (false or
otherwise)
2)
Contact their attorney at every discretionary distribution
denial, thus driving up cost of administration
3)
Lead with litigation
4)
“Game the system”
TIP: Always be prepared to resign in favor of competent
successor trustee
Peter J Wall
National Oversight Manager
Disability & Elder Trust Solutions
BOK Financial
Vice President, Trust Officer
Colorado State Bank & Trust
303.864.7238
[email protected]
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